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Ecolab in $2.2B Champion Buyout

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In an effort to expand its Global Energy Services franchise, Ecolab Inc. (ECL - Analyst Report) has agreed to acquire privately-owned Champion Technologies and its related company Corsicana Technologies for $2.2 billion, in cash and stock. This is Ecolab’s biggest acquisition since the company acquired Nalco in 2011 in a cash and stock deal worth roughly $8 billion.

Per the terms of the agreement, the mix of the overall consideration is 25% stock and 75% cash. Ecolab will make a payment of roughly $1.7 billion and issue 8 million shares of its common stock. The deal is expected to close by the end of 2012, subject to standard closing conditions and regulatory clearance.

About Champion Technologies

Houston, Texas-based Champion Technologies is a leading specialty chemical company. Its integrated offerings are an assimilation of sustainable chemistry, technology and service for the worldwide oil and gas industry.

With an employee strength of about 3,300, the company operates in more than 50 nations. Total sales for Champion Technologies in 2011 came in at $1.2 billion.

Financial Impact of the Acquisition

The acquisition will bolster Ecolab’s top as well as bottom line. It will be accretive to the company’s adjusted earnings per share for 2013 by 12 cents per share. The Zacks Consensus Estimate for earnings per share for 2013 is $3.52. The accretion is expected to increase significantly to 50 cents per share through 2016.

The company also expects improvement in EBITDA margins. The complementary portfolio is expected to result in cost synergies totaling a run-rate of roughly $150 million by 2015 with an estimated $50 million savings in operating costs for 2013.

Other Benefits

Acquisitions remain Ecolab’s core strategy to accelerate growth. The acquisition of Champion Technologies will strengthen its foothold in the energy market. Following the acquisition, Ecolab will also improve its supply chain. This will enable the company to capitalize on growth opportunities, improve inventory management and reduce costs.

The buyout will enhance Ecolab’s operating scale in North America. Moreover, the correlated technology and consumer base ensures that the deal is a strategic fit for the company as the combined venture will be well-positioned in the global energy market.

Ecolab’s Global Energy segment provides comprehensive and environmentally sustainable solutions to its clients in the petroleum, global natural gas and petrochemical industries. Ecolab expects the Global Energy segment to grow in upper-single digits in the third quarter of 2012. It also believes that the segment will exhibit healthy growth on the back of mainstay markets for 2012.

The proposed Champion Technologies acquisition will beef up Ecolab and help the company benefit from the potential represented by one of the fastest growing industries in the U.S. Following the closure, the company is slated to become a giant in the oilfield chemical business.

The acquisition is expected to have minimum effect on Ecolab’s business cycle as the company plans to capitalize on the production phase of the energy franchise and exploit new vistas of growth opportunities in the oil and gas industry.

Ecolab envisages incremental returns as reflected in its higher expected return on invested capital. Despite the high cost, the deal structure will enable Ecolab to maintain a strong investment grade balance sheet as the company expects to return to ‘A range’ metrics within three years.

Guidance Raised

For the third quarter of 2012, adjusted earnings are expected to be 87 cents compared with the earlier range of 83 cents to 87 cents. This revised guidance is in-line with the Zacks Consensus Estimate for the third quarter and represents year-over-year growth of 16%. Ecolab envisages reported earnings per share to be 80 cents, implying one-time charges of 7 cents for the third quarter.

For the second half of the year, the company expects solid free cash flow, either verging on its net income or exceeding it for the period. Ecolab is expected to unveil its third quarter 2012 results on October 30.

Our Take

St. Paul, Minnesota-based Ecolab serves the food service, food and beverage processing, healthcare, energy, water treatment and hospitality markets both in the U.S. as well as internationally. The company continues to invest in strategic areas such as health care, food, water and energy and global pest elimination to expand its business. Management’s current emphasis is on product innovation, sales organization, volume growth, appropriate pricing, and merger synergies along with the rationalization of operating costs.

With a background of robust growth, Ecolab is poised to gain momentum via its aggressive strategy of pursuing acquisitions. Recently, the company inked a definitive agreement to acquire Mexico-based Quimiproductos S.A. de C.V., a wholly-owned subsidiary of leading consumer goods company, Fomento Econ (FMX - Analyst Report).

Moreover, Ecolab’s growth has been buoyed by its strong international presence, especially in emerging markets like Asia-Pacific and Latin America. Despite the impressive strong international exposure, we remain cautious on Ecolab owing to the aggressive competition from the likes of Clorox (CLX - Analyst Report) and Church & Dwight (CHD - Snapshot Report).

Raw material price inflation and higher delivered product cost continue to be headwinds for the company. Moreover, the benefit from Nalco was mixed in the most recent quarter. Thus, we remain wary about intangible risks and operational synergies from this new acquisition.

Ecolab exited the second quarter with cash and cash equivalents of $304.9 million, up 86.8% from the previous-year quarter. Long-term debt increased approximately seven-fold to $4,879.2 million. With a $1.7 billion cash payment for the acquisition of Champion Technologies, deleveraging remains a cause of concern.

Given Ecolab’s history of posting in-line or higher quarterly earnings, we remain optimistic about the company achieving its third quarter forecast. We currently have a ‘Neutral’ recommendation on Ecolab. The stock carries a Zacks #2 Rank which translates into a short-term Buy rating.

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